June deflation eases CPI fears

June deflation eases CPI fears

T HE rate of inflation appears to have stabilized after showing worryingly high trends, according to the latest monthly report from the National Bank of Cambodia (NBC).

In the first five months of the year the Consumer Price Index (CPI) increased by 13.7 percent, including a 5.7 percent surge in May, but this was offset by a 2.6 percent CPI decrease in June giving a half year inflation rate of 11 percent, according to the report.

The relatively stable performance of the Riel compares favorably with last year where the CPI rose by 84 percent in the corresponding six month period, according to the report.

Deflation in June was substantially caused by a drop of nearly 3 percent in the price of the food sub group of the CPI, and a 2 percent drop in the price of charcoal-a form of fuel widely used by the average Cambodian household.

The report said: "In the first half of 1994, political developments have tended to overshadow a number of achievements in the economic sphere.

"Successes include the containment of inflation, the stabilization of the Riel, and the reduction in the rate of monetary expansion."

The Riel appreciated from 2,565 to 2,515 riel per US dollar during June, according to the report.

The Riel also appreciated relative to gold, a chi bar (1 Chi = 3.75 grams) sold for 112,000 riel in June as compared to 115,000 riel in May. In the same period gold appreciated relative to the US dollar from $385 to $395 per ounce.

But in an attempt to shore up further support for the local currency and encourage people to use the riel as a store of value the NBC has issued new guidelines requiring commercial banks to pay a minimum interest rate on Riel deposits of 2.38 percent per month (28.56 percent per year). The banks are free to offer higher interest rates if they wish.

The new measure which applies from July 1 this year to time deposits held for at least three months was able to be introduced because of the relative stability of the riel and the containment in inflation, according to the deputy governor of the NBC Tioulong Saumura.

While the money supply grew by 4.2 percent in June, as measured by M2, the report said this was entirely caused by an increase in foreign currency deposits (quasi money) of 13 percent.

Narrow money (M1), as measured by the amount of riel circulating in the economic system and bank deposits denominated in riel, actually fell from 188.2 to 183.8 billion riel in June, according to the report.

But the net liabilities of the Government to the banking system, as measured by Net Claims on Government, grew by 39 percent to 118.1 billion riel ($47 million ).

The report said this was caused by a running down of government deposits in banks from 133.1 to 100.2 billion riel which represents a 13.1 million dollar decrease in such deposits.

The Net Foreign Assets of the banking system improved by nearly 16 percent in June to around 215 billion riel. Foreign assets grew by 24 billion riel because of the inflow of foreign assistance to the official sector while foreign liabilities fell by 5 billion riel, according to the report.

The gap between the official exchange rate set by the NBC and the lower unofficial rate determined by market forces converged to 0.5 percent in June as compared to the 1.1 percent spread recorded in May, according to the report.

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